The Balanced Scorecard - advantages and disadvantages

Document Summary

Part A
1. Preface
2. Closure in January
3. Closure in June
4. Conclusion

Part B
1. The Balanced Scorecard
2. Referencing List and Bibliography

Part A: Case study Farmlea Ltd.

1. Preface

At present Farmlea Ltd is involved in publishing, printing and distribution of catalogues and manuals. Since the management has already decided to close the printing and distribution departments Farmlea Ltd wants to focus only on publishing, while the other activities can be transferred to Langdale Ltd. In the first part of my assignment I want to deal with the only remaining controversial issue, whether the closure should take place at the beginning of the year on 1st January or 5 month later on 1st June.

Although it is not directly necessary for this decision problem to show all incurring costs of the departments in every month from January till June, in my opinion it gives a better general survey of the problem as well as a more detailed view where costs arise. I also included not directly relevant costs which do not change if closure takes place either in January or in June. For the sake of completeness I integrated those costs in my calculation, although they do not affect the final decision (e.g. material or occupancy costs of the publishing department).

What happens in he time after June month must not to be regarded, because then the situation in both cases is exactly the same (departments are closed, staff is transferred, equipment is sold…).

The given costs for a typical month (see chart 1) have to be adapted by some further information to receive the relevant costs for the decision.

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Chart 1: typical monthly costs of Farmlea Ltd (initial situation)

I will show the calculations for staff-, material-, occupancy-costs and depreciation separately for a closure in January and June by dealing with one issue after another and at the end of each closure-scenario I will summarise all relevant calculations in a survey-chart.

2. Closure in January

Salaries & wages

The staff in publishing department remains (except a vacant position which is replaced by one staff member from the other departments who earns £100 more per month).

Furthermore, two experts from printing are transferred to publishing for £1,750 each when closure takes place.

Because the other departments are closed no salaries have to be paid for them, but a redundancy pay amounting to twice the normal monthly salary is due:

Distribution: £6,000*2 = £12,000

Printing: [£20,500 - £3,500 (retained experts) - £1,550 (transferred staff member)]*2

= £30,900

In total: £42,900 redundancy pay

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Chart 2: Staff costs January till June

Materials

The normal monthly costs in publishing remain. The other departments are closed, but in printing existing stock can be sold to Langdale Ltd which gives rise to a positive cash flow of £12,000 (there are no relevant costs for this material, because it was bought in the past for £19,500 what must be seen as sunk costs).

In distribution there is an existing delivery contract for January and February (£500 for each month) which can be cancelled by a one-off payment of £300 (then no further costs of buying the goods would arise). Another possibility is cancelling just the February delivery for £100 (i.e. saving the £500 for February) and selling the January delivery to Langdale for £390, so that in total costs of £210 accrue (£500 - £390 in January + £100 in February).

Finally Farmlea can take both deliveries and sell them to Langdale (£500 - £390 = cost of £110 in both month).

The second alternative seems to be the one with the lowest cash outflows and is taken for granted in later calculations.

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Occupancy costs

The typical monthly occupancy costs for publishing (£9,500) remain.

In printing and distribution these costs decrease 30% and 25% respectively (directly attributable costs which are avoidable on closure). The remainder of both are apportioned costs which are said to be diminished again about 15% when the departments are closed. (Calculations can be seen in chart 4 and 6).

If closure takes place in January the rooms can be sublet for £2,900 (positive cash flows).

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Depreciation & equipment sales

Although depreciation charges remain constant in publishing I do not take them into account because they are no cash flows (negligible for this decision).

In printing and distributing equipment is sold after closure for £31,000 and £49,500 respectively. The actual book value can be seen as sunk (assets had been purchased in the past) and should not affect the judgement, only the mentioned positive cash flows should.

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Chart 6 shows a summary of the calculations for a closure in January including the monthly costs for Langdale’s services.

As already mentioned I just took the costs into account that appeared to be relevant for the closure decision. These are summed up in the last lines (the NPV calculation is optional, with an assumed costs of capital (WACC) of 10%).

The results of closing the two departments in January are one the one hand additional positive cash flows (e.g. by selling the assets and materials) and savings (in occupancy costs) but on the other hand also additional costs (for Langdale’s services and the cancellation of the delivery contract). According to my calculations Farmlea faces costs for 6 month amounting to £814,960 (NPV in January of £660,600).

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3. Closure in June

Salaries & wages

As before the staff in publishing remains (just one is replaced by another employee who receives £100 more). On closure in June the two experts are transferred from printing to publishing for £1,750 each.

The personnel in the other departments remains till the end of Mai:

Printing: £20,500 per month - £1,550 per month (staff transfer in January) = £ 18,950

Distribution: £6,000 per month

In June when the divisions are closed the redundancy pay is due again:

Printing: £20,500 - £1,550 - £3,500 (retained two experts) = £30,900

Distribution: £6,000 * 2 = £12,000 Total: £42,900

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Materials

The publishing department will have its typical monthly costs, while printing can set its stocks against the costs in January (material is already in stock, costs are sunk and thus negligible. The existing goods diminish the usual January payment: £34,500 - £19,500 = £15,000). After January the typical costs have to be paid till end of Mai to keep the business running until the closure (the same applies to distribution).

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Occupancy costs

Occupancy costs in each department persist till June, when the costs of the outsourced departments decrease by 30% and 25% respectively (directly attributable costs which are avoidable on closure). The remainder (apportioned costs) is again decreased by 15%

(Calculations can be seen in chart 9 and 11).

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